Building alliances, gaining public trust: Chile’s financial management reforms

Also available in: Español

Note from the editors: The following is an interview with Patricia Arriagada, former acting Comptroller General of Chile, and Patricio Barra Aeloiza, Head of Accounting Analysis Division of the Comptroller General Office, who have been instrumental in recent reforms of public financial management systems in Chile.

Starting in 2010, Chile embarked on a journey to improve public sector accounting by converging to an international standard of financial reporting by 2016. The country expects to produce its first fully compliant financial statements in 2019. One main objective of this reform is to ensure that financial information generated by the government accounting system is comprehensive, reliable, and useful for decision-making. Another is to increase the levels of fiscal and financial transparency and accountability in the public sector.
 

These reforms were driven by the Comptroller General office, is what is known as a “Supreme Audit Institution,” and is responsible for monitoring revenues and expenditures in all parts of the government – in particular, ensuring the quality and credibility of financial management and financial reporting.

Q: Discuss the current situation of Chile in the context of public sector accounting. What are the signs and concerns that prompted this reform?
A: The signals came from both the international context and the internal environment. When the process 2010 began, we were aware that these rules were being adopted by a large group of countries with the fundamental objective of increasing transparency and reliability of information. This was also driven by the crisis of sovereign debt in countries in Europe. There was also a concern of international organizations (World Bank-IDB-OECD) that Chile advance and adopt international accounting standards applicable to public sector entities.

In addition, from the internal point of view, the country was concluding the process of adoption of International Financial Reporting Standards (IFRS) in the private and financial sectors, which also seemed a natural step to continue with the adoption of International Public Sector Accounting Standards (IPSAS) for the central government.

For the Comptroller General, another influential factor was the belief that Chile should begin to provide detailed financial statements to comply with an internationally recognized standard of information. At the time, there was only aggregate data available on the public sector.

At the same time, considering the need to improve accrual accounting method with which the country had operated for decades, this project seemed like a natural step to improve the financial information available to users.

Q: Why now?
A: At the time, transparency in the public sector had become an important theme. A sense of distrust had increased among citizens and we believed that this reform would help increase confidence in the financial management of the public sector.

Q: What is the main objective of the reform?
A: The main objective is to increase the financial transparency of public sector and to be in line with international standards. In a globalized world, we must also have a common language in financial matters.

Q: Why should the general public be interested in the results of this reform? How would you explain the importance of this reform to your 12-year-old nephew?
A: This reform will allow the public to know, in a much more precise and transparent manner, about the resources and debts of the state, how the money is spent and where revenues come from, thanks to published reports called "Financial statements." The public will also be more informed about the intergenerational responsibility in the management of public resources, contributing to more informed political and electoral processes. These reports also allow for year-to-year comparisons and for the identifications of possible improvements.
This is the equivalent of having information about all that a household has and everything it owes, for example: auto, toys, bicycles, home, their value, if they still work, if we should change them and how much money we have to spend in order to ensure the rights and responsibilities of all members of the family in the proper use of the family’s resources.

Q: What are the main types of resistance that the Comptroller General's Office (CGR) has or is facing in the process of preparation and implementation of the reform?
A: There was initial resistance from the financial services authorities when the Comptroller General required that they provide certain information necessary for the implementation of the international standards, especially information on fixed assets. This resistance derived from concerns about the costs of the reform associated with human resources and information systems.

In the course of reform, public officials have reacted differently to the standards of professional competence required by the new standards, and a major group expressed concern at the increased responsibility that they would have for accounting records. The tradition of public accounting in Chile has been to teach various materials at a very specific level of detail. For example, the Comptroller General required the use of a specific table for all fixed assets. Under the new standards many of these matters are defined by governmental agencies themselves, taking into account their particular circumstances. The same applies to the application of the concept of "significance," widely used in the new rules. For various economic facts, public officials must decide what is significant and what is not. This is a new role for civil servants, now that they won’t have rigid rules.

Although not technically a resistance, the Comptroller General had to convince and build strategic alliances with other key authorities in the process (Budget Office, Ministry of Finance, Banking and Securities Commissions, and state universities, among others), in light of the fact that this reform does not require a legislative change in our country.

Q: How was this resistance to change handled?
A: We made a special effort to publicize the benefits to the country that a change like this will bring.

The support of international organizations was also instrumental in giving validity to the project within the country. In particular, the support of the World Bank and the Inter-American Development Bank has been a great help to support the project.

In addition, the adoption process was carried out collaboratively. We invited all of the government agencies to help in drafting the regulations through a pilot group. We also increased our links with consultants and universities who participated in committees to review the draft.

It’s also important to note that we got the support of the Budget Office in modifying the main computer system used by Chilean governmental entities for financial and accounting management.

Finally, a very important aspect was the strong leadership of the higher authorities of the Comptroller General itself.
 
Q: Could you share a story about it?
A: A department head said he would not sign the financial statements since this would mean that "he would have to review and take responsibility for them to be well done." This was exactly the purpose of financial statements, and after several explanations and phone calls, the department head understood understand that this was precisely the objective of the reform – healthy responsibility by the hierarchy for the financial management of the entity.

Another story comes from the enthusiasm with which many financial authorities have embraced the process, trying to apply the rules to unusual situations. For example, they applied it to the assets of state kindergartens, the "Moai" (landmarks) of Easter Island, the ship "Esmeralda" of the Navy, to the texts of the Nobel Prize for literature Pablo Neruda and Gabriela Mistral, or the sword of Arturo Prat, a national hero. Beyond the anecdote, this enthusiasm is valuable to the momentum of reform and thoroughness with which the Chilean public services have made the change.
 
Q: How has the regional network of Government Accountants (FOCAL) supported the reform process?
A: Through the organization of events for sharing experiences and views. In addition, the realization of FOCAL meetings brought top international experts to the region, which has also helped to strengthen the processes of the participating countries.

Q: What kind of support has the Chilean Comptroller General given to colleagues in other countries and how do you expect efforts of this reform to support other countries in terms of examples or lessons learned?
A: The accounting authorities of El Salvador, Honduras, Guatemala, Colombia visited our country to learn about the Chilean experience in the process of adopting International Public Sector Accounting Standards. We also have shared the experience of regularization of fixed assets with officials and financial experts from Panama and Dominican Republic.
 
Q: What's next, what are the next steps?
A: As of January 1, 2016 implementation begins, in which the requirements of IPSAS 33 will apply, which allows three-year transition to Financial Statements that have full compliance. In this period the training to be carried out by the Comptroller General and support to governmental agencies in their implementation processes will be essential.

They should also run post-implementation tasks, after having completed the three-year period of transition. At this stage the challenge will increasingly perfecting the quality of financial statements prepared by the governmental agencies.

In parallel to the above, while progress will be made on a plan of policy development and implementation in other sectors, such as the municipal sector, in which a strategy of regularization of accounting information will be displayed prior to the application of the new rules.